Travel

How Expedia Took Out Travelocity

It may be too soon to bury Travelocity, but it appears an opportune time to write its obituary. Under a long-term agreement, online competitor Expedia (EXPE) will power the search results on Travelocity, which will be paid for whatever traffic it sends to the larger company, much as Internet searches on Yahoo! (YHOO) are “powered” by the Bing (MSFT) search engine.

The agreement comes amid widespread speculation that Sabre Holdings, which owns Travelocity, is preparing for an initial public offering that might take place as soon as 2014. Texas-based Sabre operates one of the major global distribution systems (GDS) for airline reservations. These computerized platforms—which date to 1960, when Sabre and IBM (IBM) launched the first such model—provide the data for flight information sold by travel agents, including online players such as Expedia and Priceline.com (PCLN).

Preparing for an IPO typically involves polishing a company’s balance sheet, and Travelocity—a tech operation with steep engineering costs, among others—is widely considered to blemish its parent’s financials. The site has seen a sharp drop in traffic in recent years and accounts for less than 10 percent of Sabre’s revenue, a Moody’s (MCO) analyst told the travel news journal Tnooz this month. Meanwhile, an online business such as Travelocity incurs ongoing capital costs.

In an Aug. 23 blog post, Hudson Crossing analyst Henry Harteveldt called the combination a “virtual merger” and likened the process to “someone who finds themselves newly divorced and in need of getting into shape ahead of re-entering the ‘dating pool.’”

Much of that fitness exercise will come in the form of job cuts, with the site’s engineering and other costs assumed by Expedia. Travelocity will continue its marketing efforts, which include the traveling gnome it has used in television commercials for several years. “Clearly, they didn’t get the offers they wanted to make it attractive enough to sell it,” Harteveldt says.

Travelocity spokesman Joel Frey declineD to comment on terms of the agreement or to say whether Sabre tried to sell the company before reaching the agreement with Expedia. No decisions have been made about how many job cuts will be made as part of the agreement, he says.

Private equity firms Silver Lake and TPG acquired Sabre in March 2007 for about $5 billion, including debt. The company was spun off by AMR (AAMRQ), parent of American Airlines, in 2000. TPG declined to comment ON Monday; a spokeswoman for Silver Lake said no one was available to comment.

Under terms of the deal, “the brand is as hollow as the gnome itself,” Harteveldt says. “It really means that with this decision, they are gutting the brand.”